Introduction to this report:
The slow recovery of international flights in 2023 and the large number of Air China widebody aircraft dragged down profit recovery. Aviation demand will remain resilient in 2024. International flight increases will drive a recovery in supply and demand, and the profit center can be expected to rise. The Spring Festival travel season is expected to catalyze an improvement in expectations.
Summary:
China Airlines is the leading value leader in the super cycle and has maintained an increase in holdings. The slow international recovery in 2023 and the large number of Air China widebody aircraft dragged down profit recovery. Among them, the 23Q4 loss market expectations were sufficient. Aviation demand will remain resilient in 2024, and international flight increases will drive a recovery in supply and demand. The company has the highest quality airline network and passenger source in China's aviation industry, and the profit center can be expected to rise. Considering the fall in volume and price in 23Q4, the net profit forecast for 2023 was lowered to -11 (originally 200) billion yuan, maintaining the 2024/25 billion yuan. The Spring Festival travel season may catalyze an improvement in expectations and maintain the target price of HK$9.29.
Wide-body machines dragged down turnover recovery in 2023, and Q4 loss market expectations were sufficient. In 2023, China's domestic demand for civil aviation surpassed 2019, while international recovery was slow, surplus capacity was invested in domestic capacity, resulting in oversupply, and widebody aircraft dragged down the recovery of Air China's turnover. Benefiting from the airline's active revenue management and initial reflection of the market-based effects of ticket prices, the central increase in ticket prices. Under the same caliber, compared to 2019, the company's ASK recovered 88% in 2023, with 114% for domestic routes and 42% for international routes; RPK recovered 79% in 2023, with a passenger occupancy rate of 73%, still lower than 81% in 2019; passenger revenue in 2023 is expected to be higher than in 2019. The company's performance report estimates net profit to be -900 million yuan to -1.3 billion yuan in 2023, after deducting non-net profit of -2.7 billion yuan to -3.7 billion yuan, of which 23Q4 losses are sufficient.
The 14th Five-Year Plan fleet decelerated rationally, and the fleet structure adjusted to adapt to the new normal. As airspace bottlenecks continue for a long time, airlines generally plan to slow down the 14th Five-Year Plan in 2019. According to the consolidated report of the company holding Shanhang, the fleet size reached 905 aircraft at the end of 2023, a cumulative increase of 10% over the end of 2019, with a compound annual growth rate of 2.4%; of these, there was a net increase of 12 aircraft in 2023 (23 aircraft introduced/11 withdrawn), an increase of 1.5% over the previous year. At the same time, the share of wide-body aircraft has dropped from 18% at the end of 2019 to 15% at the end of 2023, and the fleet structure was adjusted to adapt to the new normal in the international market. The trend of international flight increases in 2024 is determined. We believe that the importance of capacity absorption is to drive the recovery of domestic supply and demand.
The risk of additional distribution and dilution is limited, and the long-term profit center can be expected to rise. At the end of 2023, the company announced plans to issue no more than RMB 6 billion in additional A-share financing to AVIC Group and no more than HK$2 billion for H shares to AVIC. As a result of the impact of the three-year epidemic, airline debt ratios are generally high and have been increasing one after another. The company completed a fixed increase of RMB 15 billion in early 2023. This scale control was superior to market expectations, and the controlling shareholder subscribed in full cash. The cumulative increase was smaller than that of comparable peers, which also reflected confidence in future profits. Air China is the only flag carrier in China, shouldering the heavy strategic responsibility of being a civil aviation power. Air China has the highest quality airline network and passenger sources, and will continue to lead the airline in profitability.
Risk warning. Economic fluctuations, oil price exchange rates, industry policies, growth and dilution, safety incidents, etc.